The events of the last few months with the shootings of unarmed black men and a woman and the extreme health crisis leading to continued economic disparity for women and people of color (higher unemployment rates1 and intensifying income inequality2) have resurfaced the economic injustice that has been plaguing our society. Economic injustice is not a new issue, this was raised by Martin Luther King Jr in 1966, over fifty years ago, as being one of the primary reasons for poverty and inequality in America. Economic injustice is a structural issue that is rooted in a long history of government policies, access to education, access to healthcare, and financial exclusion. Investors have become increasingly aware that the financial sector has played a role in creating these injustices. Thus, more intentional investing has the potential to resolve some of these injustices.
This commentary is intended to highlight investment strategies that investors and companies are beginning to implement as well as the economic case for these strategies. This list is not intended to be exhaustive and we acknowledge that investing with a racial justice lens is still evolving. Also, several solutions across the spectrum of impact will be needed to drive real change and move us toward a more equitable society.
Environmental, Social, and Governance (ESG) Integration
As of June 25, 2020, 217 of S&P 500 companies have come out with statements with regards to their values on Black Lives Matter and the shooting of George Floyd3, recognizing that investors are evaluating them not only on financial return but also how they engage with all stakeholders (i.e. shareholders, customers, employees, communities, etc.). For many companies, their business is funded through the capital markets (debt and equity) and those markets charge a cost of capital for doing business. Until recently, that cost of capital was primarily dependent on the financial return delivered to shareholders and did not factor in how the company engaged with all stakeholders. That is changing. S&P Global Ratings published4 recently that they consider “workforce diversity, safety and management, customer engagement, and communities” when evaluating a company’s exposure to social risks and the effect of those risks on the company’s credit quality. Last week, State Street announced that the company is taking steps to “ensure that the companies in its portfolio are working to increase racial diversity within their ranks.”
Investor groups, individuals, and non-investment groups have also stated how important ESG is to them in the investment decision-making process. Evidenced by their response5 in opposition to the Department of Labor’s (DOL) most recent proposal aimed at restricting ESG funds in retirement accounts (see Syntrinsic’s The Value of Pensions).
The pandemic has really clarified the need
for companies to be sustainable and resilient, with the constraints of social
distancing putting pressure on revenue streams, supply chains, and ultimately
balance sheets. This recent downturn has highlighted that more sustainable and
resilient companies have been favored in the marketplace. MSCI reported that 15
of 17 sustainable indices and Morningstar’s 51 out 57 sustainable indices
outperformed broad market counterparts.6
Thus, while some investors remain concerned that investing with a social lens
might impair returns, the data increasingly indicates otherwise.
Investing in Communities of Color
Historically underserved communities have experienced a lack of access to financial services which has contributed to the increasing wealth divide. As of 2017, nearly half of black households are unbanked or underbanked.7 Investing in these communities can be mutually beneficial for those communities as well as the overall economy. McKinsey anticipates, that by closing the racial wealth gap, US Gross Domestic Product (GDP) could be 4-6% higher by 2028.8 In this low growth environment that could be a significant boost to the overall economy.
Several companies have started to make this connection. Netflix, in June, invested $10 million in Hope Credit Union – a Community Development Financial Institution (CDFI) and nonprofit lender – to build economic opportunity in Black communities. Many CDFI’s9 are structured as nonprofit lending institutions whose missions are dedicated to delivering responsible affordable lending to help low income, low wealth, and disadvantaged people and communities. Alphabet (Google’s parent) also invested in a CDFI to finance small businesses in black communities with a portion of its recent issuance of $5.75 billion in sustainability bonds.10 Sustainability bonds have provided investors with the ability to invest indirectly in communities and have provided companies with access to lower-cost capital. Goldman Sachs, the underwriter for the Alphabet issuance, stated Alphabet saved three to five basis points on interest costs because it was a sustainable bond.11
Understanding the extreme need and the ability to have a more directed impact, some investors have also provided CDFI’s with loan capital and/or opened deposit accounts, which ultimately provides lending capital, to spur economic activity in underserved communities as well as earn a financial return. In addition, investors that are more philanthropic in nature have provided loan guarantees and grant capital to support businesses recognizing that a blended capital (grants and investments) approach can catalyze even more opportunities for investment.
Divestment
Divestment has also been a long-standing strategy for many investors focused on economic injustice and racial equity. Two more targeted areas of divestment have been private prisons and predatory lenders. Predatory and payday loans have high-interest rates and fees that hinder the borrower’s ability to pay back the debt. Payday and/or predatory lending has had a disproportionately negative impact on communities of color.12
In 2016, black Americans comprised 27% of all individuals arrested in the United States – double the share of their total population and are 5.9 times more likely to be incarcerated.13 Investors have been divesting from organizations that profit from mass incarceration, such as private prisons, to cut off the flow of capital. Private prison divestment aims to hold these companies accountable for their role in the mass incarceration of communities of color. To support those that have been arrested, philanthropic Investors are also investing in and/or providing grant capital to bail funds, recognizing that 60% of people in US jails are detained while awaiting trial14 because they lack the money for bail.
Shareholder Advocacy
Shareholder Advocacy is a powerful tool that investors use to promote social change within companies. Using stock ownership to advocate for workforce diversity, living wages, equal pay, and community investment can go a long way to stemming economic injustices. As You Sow, a nonprofit shareholder advocacy organization, highlights that corporate power is the most dominant force on the planet. Of the 100 largest economic entities in the world, nearly 70% are corporations.15
Diverse Investment Management
The financial services sector has historically had an underrepresentation of women and people of color versus their representation in the population. Below is a table outlining the representation of women and people of color that are financial analysts or financial advisors in 2019 as per the U.S. Bureau of Labor Statistics.
Investors have realized that hiring diverse-owned/and or managed investment managers could not only potentially improve performance but also provide access to capital to women and minority entrepreneurs, promote workplace equity, and help create products and services for underrepresented groups. McKinsey estimates that the likelihood of financial outperformance is +36% for diverse executive teams.
While not a new initiative as investors have been focusing on racial equity in investment management for many years, there hasn’t been a universal standard for measurement. This moment has been a catalyst for several initiatives, pledges, thought pieces and whitepapers, such as ABFE Investment Manager Diversity Pledge, Confluence Philanthropy 2020 Belonging Pledge, Diverse Asset Managers Initiative, Mission Investors Exchange, and International Endowments Network highlighting examples, best practices, and networks.
Conclusion
The extreme disparity in opportunity, access, and investment over hundreds of years and in every corner of America has led to income inequality, wealth disparity, and the racial divide we are experiencing in our country. Asset owners/investors can provide access to capital for underserved communities and diverse managers, promote workforce diversity, and advocate for equal pay in companies. These things alone could move the needle toward a more just society. While there is more work to be done to create an inclusive financial sector, investors do not have to wait to invest with a lens toward reducing economic injustice.
Previously called Weekly Recaps, this content can now be found under Economic Reflections.
- Pew Research, Unemployment rose higher in three months of COVID-19 than it did in two years of the Great Recession, June 11, 2020
- Washington Center for Equitable Growth, The coronavirus recession and economic inequality: A roadmap to recovery and long-term structural change, August 7, 2020
- S&P Global Ratings, 217 of the S&P 500 companies have responded to the shooting of George Floyd as of June 25, 2020.
- S&P Global Ratings, 217 of the S&P 500 companies have responded to the shooting of George Floyd as of June 25, 2020.
- Ceres, Investor organizations and financial industry firms’ analysis of public comments on DOL ESG proposal shows landslide of opposition, August 20, 2020
- Morningstar, Sustainable Funds Weather the First Quarter Better Than Conventional Funds, April 3, 2020
- McKinsey, The case of accelerating financial inclusion in black communities, February 25, 2020
- McKinsey, The Economic Impact of Closing the Racial Wealth Gap, August 13, 2019
- Opportunity Finance Network, Types of CDFIs
- International Capital Market Association, Green, Social and Sustainability bonds, https://www.icmagroup.org/green-social-and-sustainability-bonds/
- Bloomberg, Sustainable Finance Sees Big-Tech Boom After Record Google Deal, August 7, 2020
- ACLU, Predatory Lending: Wall Street Profited, Minority Families Paid the Price, September 16, 2011
- The Sentencing Project, Report to the United Nations on Racial Disparities in the U.S. Criminal Justice System, April 19, 2018
- Brooklyn Community Bail Fund
- As you Sow, Theory of Change
- US Census